MLPs are a favorite of income investors, who get paid distributions of the cash flow the companies generate just for sitting on top of assets, such as oil and gas pipelines. That includes household names such as Kinder Morgan (KMI) - Get Report and Cheniere Energy (LNG) - Get Report .
In a way, the inclination of mega-cap tech companies such as Apple, Amazon (AMZN) - Get Report , Alphabet, Facebook (FB) - Get Report and Microsoft (MSFT) - Get Report is increasingly to try and extract a highly reliable stream of cash flow from its captive audiences by virtue of being some of the biggest tech companies in the world.
As I wrote recently, Apple and the others are reaching for subscription services to smooth out their revenue picture. Apple's introduction of its Apple TV+ streaming service on March 25 felt like a me-too effort, a way to simply extract a bit more in monthly fees from its audience. As Oprah pointed out when she joined CEO Tim Cook on stage last Monday, "They [Apple] are in a billion pockets, you all. A billion pockets." And now, it's digging a little deeper into all those pockets.
These companies, Apple and its select few peers, are seeking to de-risk their businesses. Growth has become more challenging for all of them as they have simply achieved incredible size. At this scale, it becomes hard to continue to wow Wall Street every quarter. As I wrote in February, shortly after earnings results were released for Amazon and others, rates of revenue growth have cooled. Apple is no longer disclosing units sold of its biggest product, the iPhone. There is a will to take the risk out of the giants' businesses and achieve something more stable-- hence the attempt to milk their audiences via subscriptions.
By rights, with enormous cash flows coming out of these companies, and with no immediate use for all that cash given the efficiency of their R&D processes, over time they should be re-incorporating as MLPs or something like it.
Amazon, for example, spent just under $29 billion on "technology and content," in 2018, some of which equates to R&D in the classic sense. That's just 13% of the company's revenue last year. Amazon made about $17 billion in free cash flow, meaning they had ample money left over after funding their development process.
They should be redistributing profit to shareholders at a rate that reflects their cash generation, quarter by quarter.
Apple has $130 billion in net cash and is paying out at a rate of $100 billion annually, but it is also generating cash of about $70 billion annually. Numbers are similar for the other giants: tons of cash and tons of free cash flow generation, although only Apple and Microsoft pay dividends, with comparable current yields of 1.57% and 1.5%, respectively.
The vast majority of cash used in capital returns by tech companies tends to be for buybacks, which, unlike direct distributions of cash to shareholders, plays into what some believe is a game to prop up quarterly earnings by reducing the share count.
Unfortunately, there seems to be little incentive to stop playing that game for any of the tech giants. Their shares have become the bulwark not just tech portfolios but also ETFs, given their representation in the broad market indices. There's a machinery that automatically accepts these stocks, in other words.
But the dominance of the companies suggests that the money they are stockpiling, and the shares they are putting to work, may not be the best way for cash to be used. Returning it to shareholders directly might be a better path if Apple and the rest are committed to making their businesses so predictable and risk-free that they are basically very boring.
The tech giants have not yet become rent seekers, a term used to describe businesses that merely extract a fee for sitting on valuable assets. But that is the direction they are signaling to Wall Street with the latest moves such as Apple TV+.
One can't expect an actual MLP conversion by any of these companies, as I said. Perhaps the best thing one can do is shift the emphasis of one's portfolio to the two names that pay out some dividend, Apple and Microsoft. It's not an ideal situation, but with is in accord with the reality of a pan industry that is now more about churning out cash than anything else.
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Tiernan Ray neither owns nor trades shares of any companies mentioned in this article.